Legal advice for franchisees
Becoming a franchisee
"Buying a franchise is different in important ways from buying another business. You will be entering into a long-term relationship with your franchisor in which you will have to rely on it to a large extent for the success of your own business. You will not be allowed to run your business as you think fit. You will be obliged to run it precisely in accordance with your franchisor’s System.
"Franchising does not remove all risks, which include:
- Inadequate pilot testing
- Poor franchisee selection
- Bad structuring of the franchise
- Under-capitalisation of the franchisor or franchisee
- The franchisor may run its business badly
- Competitive risks
"In assessing a franchise opportunity, you must carefully consider the following critically important issues:
- Examine franchisor’s financial position in great detail
- How thoroughly has it market tested the business?
- How well the System works in practice?
- Is the business temporarily fashionable?
- Ask an experienced franchising solicitor to check the franchise agreement - an accountant should check the business plan
- Ask several existing franchisees about their experience
- You must appreciate that there is always the risk that you might not be successful in the business, despite the success of others
"The legal basis for the relationship is the franchise contract. Normal contract features include:
- Identification of the franchisor’s proprietary interests
- Nature and extent of the rights granted to franchisee
- Term of the Agreement and Renewal
- the term must be long enough for you to recoup your investment and
make a return from building up the business. Most franchise agreements
provide a qualified right of renewal. - Fees Payable - initial and ongoing
- Extent of the services provided by the franchisor, both initially and on a continuing basis.
- Initial and continuing obligations of franchisee
- range from business set-up complying with the franchisor’s
requirements, to undertakings to comply with operating, accounting and
other administrative systems. After training to operate the business
successfully, you will be subject to non-compete and confidentiality
obligations. - Operational controls imposed on franchisee
- intended to ensure that operational standards are properly maintained
- failure to maintain standards in one unit can harm the entire
network. - Sale of the business - can you
build up the business and sell with a capital gain? However there will
always be controls. If none, that should be a matter of suspicion! - Death of franchisee - can the business be preserved as an asset and sold/ taken over by your dependants if they can qualify as a franchisee?
- Termination and consequences
- your breach of the agreement may lead to its termination! You should have the opportunity to put right minor remediable breaches. You will lose the use of the trade mark/trade name, and other rights owned by the franchisor. You will be under an obligation for a reasonable period not to compete with the network, and prohibited from using the franchisor’s System and methods. The franchisor may have options to buy the business. Valuation provisions should be carefully checked!
There are risks and pitfalls! Proper legal advice must be taken."
Chris Wormald, Head of Franchising, Eversheds
